Question

I have 15 minutes to answer question.

1-Your company, Dominant Retailer, Inc., is considering a project whose data are shown below. Revenue and cash operating expenses are expected to be constant over the project's 5 year expected operating life; annual sales revenue is $95,000.00 and cash operating expenses are $37,500.00. The new equipment's cost and depreciable basis is $135,000.00 and it will be depreciated by MACRS as 5 year property. The new equipment replaces older equipment that is fully depreciated but can be sold for $7,500. In addition, the new equipment requires an additional $5,000 of net operating working capital, which can be fully recovered at the end of the project. The new equipment is expected to be sold for $10,995 at the end of the project in year 5. The marginal tax rate is 28.00%. What is the project's Initial Cash Outlay at Year 0? Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

2-Using the information from problem 2 on Dominant Retailer, Inc., what is the Year 4 Net Operating Cash Flow? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

3-Using the information from problem 2 on Dominant Retailer, Inc., what is the Terminal Year Non–Operating Cash Flow at the end of Year 5? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

4-Using the information from problem 2 on Dominant Retailer, Inc., what is the NPV of the Project if Dominant Retailer’s WACC is 13.75%? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

Answer 1

1. Initial Project Outlay = Investment in New Equipment - Salvage Value of Old Equipment * (1 - Tax) + Working Capital

Initial Project Outlay = 135000 - 7500 * (1 - 0.28) + 5000

Initial Project Outlay = 135000 - 5400 + 5000

Initial Project Outlay = $134600

2. Year 4 Net Cash Flow = (Annual Revenue - Cash Operating Expenses - Depreciation) * (1 - Tax) + Depreciation

Year 4 Net Cash Flow = (95000 - 37500 - 135000 * 11.52%) * (1 - 0.28) + 135000 * 11.52%

Year 4 Net Cash Flow = (95000 - 37500 - 15552) * (1 - 0.28) + 15552

Year 4 Net Cash Flow = $45754.56

3. Year 5 Non Operating Cash Flow = Working capital + Sale Value - (Sale Value of Asset - Book Value) * Tax

Year 5 Non Operating Cash Flow = 5000 + 10995 - (10995 - 135000 * 5.76%) * 28%
Year 5 Non Operating Cash Flow = 5000 + 10995 - (10995 - 7776) * 28%
Year 5 Non Operating Cash Flow = 5000 + 10995 - 901.32

Year 5 Non Operating Cash Flow = 15093.68

4. NPV